Online Small Business Loans: A New Frontier

Over the last decade, small business lending has undergone a paradigm shift. The days of visiting a local bank, applying and waiting weeks or months for a decision are dwindling. As finance shifts online, a new ‘alternative lending’ industry has flourished, offering online small business loans.

Over the last decade, specialty finance companies have popped up all over the internet. They originate and fund quick business loans for both individuals and small businesses.

You’ve probably noticed a blitz of ads over the last couple years for small business funding opportunities. Make no mistake; the competition for online small business loans has gotten fierce. For business owners, this competition is great news.

As you can see, an increasing number of fintech (financial technology) names have entered the space. Behind the scenes, commercial banks often provide the actual funding if the originator isn’t a direct lender. Other times, it might be an Industrial Bank, alternative asset manager or private equity firm capitalizing the transaction.

The onslaught of new lenders can mean not only lower rates, but it increases your chance of qualifying for bad credit business loans. The importance of credit scores diminishing because if one lender passes on an applicant, they know someone else is sure to fund them.

What are Online Small Business Loans?

As the name implies, these are small business loans obtained through an online application process. Typically, they’re originated and/or funded through a financial technology (fintech) company. Prospective business borrowers visit a specific online lender or marketplace and fill out a single application, often taking just a few minutes.

The actual funding can take many different forms. These range from short term loans to quarter-million dollar lines of credit. Other options include:

Common information requested include length of time in business, annual revenue numbers, business structure, planned use of funds, and business Tax ID and/or social security numbers, etc. Then, a proprietary algorithm will evaluate and analyze the provided data, coming to a funding decision.

Online loan applications generally take a few minutes to complete, and a decision comes soon afterwards. In most cases, the decision is made by a computer, not an actual banker. The exception to this is for large amounts, often anything over $150,000. But for amounts ranging from $2,500 to $50,000 the process has been completely overhauled.

In a matter of seconds, the prospect is informed if they were approved for credit and, if so, the terms. If the site is a marketplace, it will list a few different lenders’ proposals. Online lenders have much higher acceptance rates than traditional banks, but also typically charge higher fees.

Required Documentation

Bank statements will likely be requested so the lender can view monthly revenue averages and cash flow levels and patterns. Credit scores should also be pulled and is a factor in determining credit worthiness. But, unlike traditional lenders, it is a factor, but not the most important factor. It may even be possible to obtain funding with a bankruptcy on your record. Keep in mind, a personal guarantee may be required by the business owner(s).

Small businesses appreciate the ease of this process, especially when compared a traditional bank or credit union’s onerous process. Applying for a small business line of credit or loan from a traditional bank is a lengthy process. Banks require several documents including business plans, P&L statements, years of tax returns, bank statements and even letters of recommendation. If the bank rejects your business, you must do the entire process again at another bank.

What are the Pros and Cons of Online Small Business Loans?

Pros

There are plenty of benefits to obtaining financing online:

Funding Speed- Once approved, many loans and lines of credit loans are made within one day.

Ease- One application can send information to dozens of lenders who may compete for your

Better Competition-In a marketplace situation, you may get better terms through lender competition.

Approval Rates- Approval rates are much higher, even for small businesses with poor credit.

Fairness- Entrenched biases can be avoided by not meeting with a banker face to face.

Cons

There are cons that must be considered with online small business loans:

Expensive- Businesses will pay more for online loans-rates often range from 9%-25% annually.

Customer Service-Despite improvement, sometimes difficult speaking

Less-Scrutinized- Some alternative lenders have bad reputations.

Variety: Some firms may provide just a couple services, when a banking relationship could offer several more.

Unproven: Many online lenders have begun since the financial crisis. Not sure how they will fair.

As long as the online loans are sold off to investors, which is common, there is sure to be leeway given to businesses with poor credit. Also, there is currently less regulation in the online lending space than the traditional banking space faces. This relatively lax oversight has presumably helped bad credit business loans proliferate which, in turn, has led to record job creation.